Airlines will see profits fall for the first time in six years in 2017, after peaking this year, as rising oil and labor costs bite and demand slows, the International Air Transport Association said on Thursday.
IATA, representing some 265 airlines accounting for 83 percent of global air traffic, said it expects the industry’s net profits to fall 16 percent to $29.8 billion next year, mainly due to rising oil prices, and with North American carriers accounting for some $18.1 billion of the total.
It also cut its 2016 forecast for net profits to $35.6 billion, still a record high but down from a previous prediction for $39.4 billion.
Despite falling to 7.9 percent next year from 9.4 percent, the industry’s return on capital is expected to exceed the cost of capital in 2017 for the third year in a row.
Collectively, the first time the industry managed to generate an above cost-of-capital return was in 2015.
IATA chief economist Brian Pearce said airlines had recognized the need to provide returns for investors, with moves to use planes more frequently and with more seats filled helping to drive profitability.
“It’s no longer about market share, but how do we use our assets, deliver a good return on capital. It’s something that will stick with the industry and should underpin the industry’s financials,” he said.
After a strong couple of years, airlines have found the going tough in the latter half of 2016. Attacks on airports and popular tourist destinations in North Africa and Europe have dampened travel demand for some routes.
A rush to take advantage of low oil prices to offer more seats and gain customers has also put ticket prices under pressure and threatened profit margins, especially as the price of oil is expected to rise again.
The average return fare is due to fall almost 11 percent to $363 in 2016 from $407 the previous year, while fares are expected to fall a further 3 percent in 2017 to $351, IATA said.
Adding to headwinds, labor costs are also creeping up and are expected to rise 1.3 percent in 2017, while revenues per unit of capacity will remain under pressure, Pearce said.
Delta Air Lines last week lowered its profit forecast after agreeing a 30 percent pay rise for pilots by 2019, following a 19 percent rise for United Continental earlier this year. Meanwhile in Europe Lufthansa pilots have been striking over pay demands.